11 September 1989 Internal T.I. 58439 F - Intercorporate Dividends and Part IV Tax

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

September 11, 1989

Dear Sirs:

Re:  Subsection 55(2) and Part IV of the Income Tax Act (the "Act")

This is in reply to your letter of July 26, 1989 wherein you requested our opinion with respect to the application of subsection 55(2) and Part IV of the Act in connection with the following hypothetical fact situation.

1.     Opco is a subsidiary wholly-owned corporation, within the meaning assigned under subsection 248(1) of the Act, of Holdco. Opco and Holdco are taxable Canadian corporations and private corporations within the meanings assigned by paragraphs 89(1)(i) and 89(1)(f) of the Act, respectively.

2.     Opco has certain investments assets that Holdco desires to remove from Opco in order to protect such assets from the risks and liabilities of Opco's business operations.

3.     Holdco will form a new subsidiary wholly-owned corporation ("Investco"), which will be a taxable Canadian corporation and a private corporation.

4.     Opco will transfer its investment assets to Investco in exchange for redeemable and retractable preference shares of Investco having a stated capital and redemption amount equal to the cost amount and fair market value, respectively, of the investment assets transferred to Investco. Opco and Investco will jointly elect pursuant to subsection 85(1) of the Act and within the time referred to in subsection 85(6) of the Act, to transfer the investment assets at their cost amount to Opco. Cost amount has the meaning assigned under subsection 248(1) of the Act.

5.     Investco then redeems its preference shares for cash at their redemption price. Immediately before the redemption, Investco will have refundable dividend tax on hand ("RDTOH") within the meaning assigned by subsection 129(3) of the Act.

You have suggested that if subsection 55(2) of the Act were applicable to the subsection 84(3) dividend arising on the redemption of Investco's preference shares, subsection 55(2) would not apply to such portion of the deemed dividend that would be subject to tax under Part IV of the Act in Opco's hands that would not be refunded as a consequence of the payment of a dividend to a corporation where the payment would be part of the series of transactions or events referred to in paragraph 55(3)(a) of the Act.

Opinions

Whether the payment of a dividend to a corporation by Opco is part of the series of transactions or events referred to above is a question of fact that can only be determined by reference to all of the relevant facts and circumstances of a particular situation.  Subject to this comment, we would agree with your views as expressed above.

The foregoing comments are not rulings and in accordance with the guidelines explained in Information Circular 70-6R, are not binding on the Department.

Yours truly,

for DirectorOrganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch